Another volatile week for equity markets caused this time by a reaction to the Chinese central bank’s move to adjust the value of renminbi. This action appears to be the latest attempt to stimulate growth in a faltering economy. Lowering interest rates along with reducing bank reserve ratios have obviously not had the desired effect. As was the case earlier in the year when the Swiss central bank removed its currency peg against the euro, this move by the Chinese, with hindsight, seems an obvious one. In the end European markets took the brunt of the fall, German equities fell over four percent on the week. European equities appeared to take little comfort from the Greek parliament voting through the austerity measures that ensured a third bailout. European equities were also not helped by some weaker than expected economic growth rates reported on Friday.
The Ftse 100 lost over two and one half percent; however in a reversal of the trend of the previous months US equities outperformed European ones and registered a small gain on the week.
The weekend financial press was full in its analysis for the implications of this move by the Chinese government. The conclusion being that this move may well have further implications for global growth, but on the other hand interest rates in the US are now less likely to rise in September.
Despite this increased volatility, the Vix, as a measure of fear and greed in markets, showed little reaction to the events of the week. Suggesting once again investor confidence that equity markets can ride these fears, or complacency to the current events in the world. Commodity prices took another leg down this week on the revaluation of the renminbi, however prices did manage to stabalise at the end of the week.
Looking to the week ahead, for the UK Tuesday will be the focus as the latest inflation data is released for July. Expectations are for the year on year comparison of inflation to remain at zero for another month. On Thursday retail sales for the month of July are expected to show a small drop from the month of June.
This week in the US sees the release of the minutes of the last Federal Reserve rate-setting meeting. As these discussions took place before the Chinese central bank made its move, their impact may well be reduced. Otherwise it is fairly busy week on the economic front in the US. On Tuesday we get the release of a selection of data on the state of the housing market. On Wednesday aside from the minutes we get the latest inflation data. On Thursday we get the latest jobless claims data. We also get speeches from two Federal Reserve members; these speeches could have more impact as it may give some greater insight as to the Federal Reserve’s mood on interest rates post last weeks events.
Those who sold in May this year and went away have so far had a better year than some previous years, as equity prices remain sensitive to the continued concerns of China; US interest rates and fears over the Greek situation and their combined impact on global growth.